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Creating a Meaningful Budget to Direct Your Practice
Wednesday, December 11, 2019 9:00 AM
A meaningful budget can be one of the most effective planning tools a practice can use to prepare for the future. While many of you likely agree, the majority of medical practices do not undergo a formal budgeting process each year. Oftentimes, this can be attributed to being too busy, not knowing how to get started, or a lack of confidence in your ability to stick to the budget. Regardless, practices that remain successful in today’s environment will likely be those with a strong strategic plan centered around financial discipline. With that in mind, consider how establishing a 2020 budget will enable your practice to strategically navigate challenges like reimbursement cuts and rising overhead costs.
When creating a budget, practices should break it down into individual components — such as revenue and key expense categories — rather than attempt to tackle the whole thing in one go. Before you get started, consider the tips below.
- Assess historical data. To forecast the future accurately, it is important to begin with a thorough review of past figures. The review should include financial statements, physician productivity reports, employee payroll reports, marketing spend, etc. for the prior two to three years.
- Model a profit and loss statement. The structure of the budget should be set up in a similar fashion to a profit and loss (P&L) or income statement, with revenues on top followed by expenses. The goal should be to use the same revenue and expense categories that are on the income statement, as this will help to easily integrate the budget into the accounting system.
- Forecast physician revenue. Creating an accurate forecast of physician revenue can be accomplished several ways. One approach is to use objective data points such as clinic sessions worked, patient encounters, and revenue (See Table 1).
- Review staffing levels and wages. Since employee overhead is the largest expense a practice incurs, accurate forecasting of wages and benefits are essential. Start by setting up a worksheet that breaks out each individual employee, as this serves to forecast wages and benefits for the budget year more precisely (See Table 2). This level of analysis also allows practices to assess the impact of adding new staff in the budget year.
- Anticipate capital purchases. When preparing a budget, it is important to include anticipated capital purchases such as new equipment or facility improvements. Many businesses struggle in this area because the purchase of new equipment can have a major impact on cash flow, which directly impacts owner income. Make sure to identify the timing of acquisition, anticipated cost, source of financing, and depreciable life for the asset. Depending on the purchase method, the facility will likely incur interest and depreciation expenses, both of which should be included in the budget.
- Be conservative (but accurate). As a general rule of thumb, it is best to be conservative when forecasting revenue and expenses. It is almost always recommended to aim low on revenue and high on expenses. With that said, bear in mind that a budget is an important planning tool, and it cannot serve its purpose if it does not accurately reflect the current performance and future expectations of the business.
- Integrate the budget. Once the revenue and expense projections are complete, the budget should be integrated into monthly reports that compare actual results to the prior year and budget. These reports will help monitor results and identify variances that management can use to create corrective action plans if necessary.
At the end of the budgeting process, the practice should have a plan that establishes clear financial expectations and reflects the organization’s overall strategic goals and objectives. It should be used as a management tool that allows the practice to compare actual performance to budget.
A Living Document
When properly executed, the budget serves as one of the most important tools in running a successful medical practice. A proactive, comprehensive budget gives a practice the ability to properly track results, identify areas of concern, and quickly intervene when issues arise. As such, it should be seen and used as a living document that practices can use to proactively navigate today’s evolving marketplace.